Mon, 16/06/2014 - 12:36
By Olivier Sciales, Chevalier & Sciales – The approval of the UCITS V directive by the European Parliament shortly before its dissolution for elections last month has ensured that the latest iteration of the European legislative framework for the cross-border marketing and distribution of retail investment funds will not be held hostage to second thoughts by the new membership of the assembly.
The directive approved by the parliament in plenary session on April 15 is relatively limited in scope, covering depositary functions, remuneration policies and sanctions. More fundamental changes may come in the future from what will become UCITS VI.
This measure, which is still at the preliminary discussion stage, could rethink the expansion of the range of assets eligible for investment by UCITS funds launched by the UCITS III directive in 2002.
First, though, the UCITS V legislative process must be completed. First the European Council on behalf of EU member states must approve the version of the text agreed by the parliament, which is expected to be a relatively straightforward process.
Following technical finalisation of the text to revise drafting errors and omissions and add details such as timelines, as well as translation into the EU’s official languages, the directive is expected to be published in the EU Official Journal around September or October.
It will enter into force 20 days following the date of publication, after which member states will have 18 months to transpose it into national law. In Luxembourg’s case, this will involve amendment of the existing law on collective investment schemes of December 17, 2010, by which UCITS IV was adopted. The likely go-live date should therefore be some time during the second quarter of 2016.
In the meantime, the European Securities and Markets Authority is expected to issue guidelines toward the end of this year, in particular offering help in interpreting aspects of the directive’s provisions on manager remuneration, one of three areas addressed by UCITS V along with the role of the fund’s depositary and harmonisation of regulatory sanctions regimes.
Together the changes in these areas are intended to enhance investor protection, increase the degree of standardisation in the way the UCITS rules are applied by regulators across Europe, and align the rules to a greater degree with those applicable under the Alternative Investment Fund Managers Directive, although various differences remain between the retail and alternative fund regimes.
The role of the depositary is a cornerstone of the UCITS investor protection provisions. Up to now, the EU legislation simply required each UCITS to have an independent depositary and contained just a few sentences on the depositary’s role.
In some member states, the brief text of the directive was copied wholesale into national law, leaving plenty of leeway for differences in local regulators’ interpretation of the rules. That now changes because the UCITS V depositary measures contain several pages of rules.
The draft directive imposes limitations on the kinds of entity that are eligible to perform the role of a depositary to national central banks, credit institutions and regulated firms with sufficient capital and adequate infrastructure.
The depositary holds for safekeeping the assets in which a UCITS invests, protecting the ownership rights of the fund and its investors and carrying out various oversight functions. In turn, segregation mechanisms protect the fund’s assets in the event of the depositary’s bankruptcy.
It is argues that even before any changes of the eligible asset rules is introduced in UCITS VI, the depository requirements in UCITS V may have the practical effect of imposing more conservative management policies toward assets and strategies because of the detailed rules setting out the depositaries’ responsibility for oversight of compliance with the rules.
This is enforced by the depositary’s strict liability for loss of assets, which could make institutions less willing to tolerate the holding of assets or following of investment strategies that might be perceived as breaching the UCITS rules.
In line with the provisions of the AIFMD, UCITS V will require that remuneration practices affecting all ‘risk-takers’ involved in managing UCITS funds do not encourage excessive risk-taking and instead promote sound and effective risk management.
The forthcoming directive will stipulate that at least 50% of any variable remuneration (i.e. bonuses) consists of shares or units of the UCITS concerned, or equivalent instruments, unless the management of UCITS accounts for less than 50% of the total portfolio managed by the management company, in which case the minimum of 50% does not apply.
The directive also seeks to ensure more effective and harmonised administrative sanctions, including action under criminal law, which is covered by co-operation between national authorities.
The financial crisis revealed differences in the way national regulators addressed breaches of the UCITS rules. The changes set out minimum administrative sanctioning powers that all member states must make available to their respective regulators.
The stipulated sanctions run from public naming and shaming and regulatory orders to cease the conduct in question to financial penalties applicable to both individuals and companies, suspension or withdrawal of the licence of the UCITS management company, and temporary or permanent bans on individual managers of the management company or investment manager.
For further information, please contact:
Chevalier & Sciales
Partner, Avocat à la Cour
Route de Thionville 51
Office: + 352 26 25 90 30
Fax: +352 26 25 83 88
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